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Phillips 66 (NYSE:PSX)

Q3 2012 Earnings Conference Call

October 31, 2012 11:00 ET

Executives

Clayton Reasor - Senior Vice President, Investor Relations, Strategy and Corporate Affairs

Tim Taylor - Executive Vice President, Commercial, Transportation, Business Development

Greg Maxwell - Executive Vice President, Finance and Chief Financial Officer

Analysts

Edward Westlake - Credit Suisse

Doug Terreson - ISI

Jeff Dietert - Simmons

Blake Fernandez - Howard Weil

Kate Minyard - JPMorgan

Faisel Khan - Citigroup

Doug Leggate - Bank of America

Paul Cheng - Barclays

Evan Calio - Morgan Stanley

Cory Garcia - Raymond James

Operator

Welcome to the Third Quarter 2012 Phillips 66 Earnings Conference Call. My name is Ken, and I will be your operator for today's call. At this time, all participants are in a listen only-mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Mr. Clayton Reasor, Senior Vice President, Investor Relations, Strategy and Corporate Affairs. Mr. Reasor, you may begin.

Clayton Reasor - Senior Vice President, Investor Relations, Strategy and Corporate Affairs

Thank you, Ken. Good morning and welcome to Phillips 66 third quarter conference call. We appreciate your interest in our company.

Before we get started, we wanted to share our concern about those hurt by Hurricane Sandy. Many of our employees, shareholders, customers, and friends were impacted by this devastating storm. And we are supportive of efforts being made to help get lives back to normal. Our thoughts and prayers are with you all.

Joining me this morning are Tim Taylor, EVP, Commercial, Transportation, Business Development, and Marketing as well as Greg Maxwell, Executive Vice President, Finance and our CFO.

We'll give you details about our third quarter financial results provide some guidance about the fourth quarter and communicate our plans for growth and enhancing returns, which allow us to increase future distributions to shareholders. The presentation material we will use this morning can be found on the Investor Relations section of Phillips 66 website along with supplemental, financial, and operating information.

Slide two contains our Safe Harbor statement. It’s a reminder that we will be making forward-looking statements during the presentation and our question-and-answer session. Actual results may differ materially from today's comments and factors that could cause our actual results to differ are included here on the second page, as well as in our filings with the SEC.

So, that said, I'll turn the call over to our CFO, Greg Maxwell to take you through our third quarter results. Greg?

Greg Maxwell - Executive Vice President, Finance and Chief Financial Officer

Thanks, Clayton. Good morning everyone. I'll start on slide three with some highlights for the third quarter. Our reported earnings were $1.6 billion or $2.51 per share. Excluding approximately $300 million in special items largely related to impairments, our adjusted earnings were $1.9 billion or $2.97 a share. Excluding special items, our year-to-date annualized return on capital employed is 21%, which is up from 18% in the second quarter with cash from operations coming in at $1.9 billion. Consistent with our stated intent to return capital to our shareholders, we commenced our share repurchase plan in August, purchasing over $100 million of common stock during the quarter and we also paid $125 million in dividends.

Now, let's turn to slide four for a high-level look at our third quarter adjusted earnings. Compared to the third quarter of 2011 our adjusted earnings increased by $369 million. Starting from the left side of the slide, Refining and Marketing generated $1.7 billion in earnings with the majority of the $400 million improvement driven by much stronger refining margins due largely by improved crack spreads.

Midstream earnings were $56 million, which excludes the $133 million special item related to the impairment of our 25% ownership interest in the Rockies Express Pipeline. On an adjusted basis, Midstream earnings were approximately $60 million lower than last year and this decline in earnings reflects reduction in equity earnings from DCP Midstream driven primarily by lower NGL prices.

Chemicals earnings of $275 million, which excludes $122 million of special items primarily associated with CPChem's early retirement of $400 million of debt along with some asset impairments. Adjusted earnings were approximately $80 million higher than the corresponding quarter of 2011 and this was mainly due to higher margins and lower utility costs. I will cover each of these operating segments in more detail later in the presentation. Excluding $13 million of repositioning costs, corporate and other costs this quarter were $112 million. The negative $65 million variance is largely due to higher interest expense on debt that was not in place last year prior to the spin.

Now let’s take a look at cash flow for the third quarter as shown on slide five. During the quarter we generated $1.9 billion in cash from operations including $200 million of positive impacts from net working capital changes. As noted on the slide we funded $300 million for our capital program primarily Refining and Marketing related and returned more than $200 million to the shareholders in the form of share buybacks and dividends. Our cash balance increased by $1.3 billion resulting in $4.4 billion in cash and cash equivalents at the end of the third quarter.

Now let’s turn to slide six for a look at our capital structure and our returns. We ended the third quarter with $21 billion in equity and $8 billion of debt resulting in a debt to capital ratio of 28%, which is 2% lower than last quarter. Taking into account our $4.4 billion ending cash balance, our net debt to capital ratio was 15%. On an adjusted basis our year-to-date annualized return on capital employed was 21%, this is up from 14% in 2011. This improvement was driven primarily by higher refining – higher earnings in our Refining and Marketing and Chemicals segments. We ended the quarter with $29 billion in capital employed, up $2 billion compared to the second quarter. 74% of our capital employed was R&M related, down from 76% in the second quarter.

Next we’ll cover each of our operating segments in more detail starting with Refining and Marketing on slide seven. In R&M we ran very well in a strong margin environment. Globally, we ran at a 96% utilization rate despite our Alliance refinery being down for approximately three weeks related to the impact of Hurricane Isaac and our clean product yield was 83%. As part of our ongoing strategy to enhance returns, we are taking steps to process more North American advantaged crudes. During the third quarter 63% of our U.S. crude slate was advantaged and this was up from an average of 61% for the first three quarters of the year. Marketing margins were lower this quarter and we will cover this in more detail later in the webcast. Our refining realized margin was $17.05 per barrel and our year-to-date annualized return on capital employed improved to 22%.

Let’s now turn to slide eight where we will cover adjusted earnings for Refining and Marketing. Earnings for R&M were $1.7 billion this quarter. This is up from $1.3 billion a year ago reflecting significant improvements in our Atlantic Basin in Europe and Central Corridor regions, partially offset by lower earnings from Marketing, Specialties and Other or as we refer to as MSO. In the Atlantic Basin region earnings increased due to improved refining margins and lower controllable costs. Margins improved largely as a result of higher crack spreads, while controllable costs for lower primarily due to the Trainer and Wilhelmshaven refineries no longer being in our portfolio.

Gulf Coast earnings were up slightly due to high refining margins as market cracks were partially offset by lower product differentials and lower secondary product realizations. The Central Corridor improved significantly this quarter due to higher refining margins reflecting our advantaged feedstock position in the region as the WTI, WCS differential widened. And we had increased the amount of our sour crude processed at the Wood River and Ponca City refineries.

The Western Pacific region’s earnings were higher this quarter compared to a year ago primary due to higher refining margins. U.S. Marketing, Specialties and Other was down by $95 million. This is primarily due to lower margins and the negative impact associated with Hurricane Isaac. And internationally MSO was down $60 million mainly as a result of lower margins.

The next few slides highlight our performance in Refining and provide more detail on MSO. So, now turning to slide nine, Refining’s adjusted earnings increased over $500 million compared to a year ago, improved margins were the key driver with higher market cracks and higher feedstock advantages being partially offset by less favorable product differentials and secondary products. Earnings were up $55 million as a result of higher volumes, mainly in the Central Corridor where we were able to take advantage of lower cost crudes. And we also have lower operating costs largely due to no longer having the Trainer and Wilhelmshaven refineries in our portfolio.

Let’s now take a look at our market capture shown on slide 10. Here we look at our global market and realized crack spreads. The market crack was very strong this quarter and we captured nearly 80% of the market crack, up nearly 10% form the second quarter. Our realized margin for the quarter was over $17 per barrel and we capitalized on these favorable margins by operating well with 96% utilization rate.

As I mentioned earlier our actual claim product yield for the quarter was 83%, which results in the $3.42 adjustment shown on the slide. The $5.39 per barrel reduction related to secondary products reflects the fact that the non-clean products we produced attracted a sales price which on average was lower than the cost of our benchmark crudes. The positive $4.82 per barrel for feedstocks stems from crudes and other feedstocks that are priced lower than our benchmark crudes. Our feedstock advantage this quarter was primarily related to the Canadian heavy and foreign sour crudes that we processed as well as increased shale and WTI-based crudes on the Gulf Coast. Finally, the other category primarily reflects the impact of product differentials. You will see in the appendix that we've also included updated market indicator crack spreads for each of our regions.

So, moving on to slide 11, this slide shows that during the year we've increased advantaged crude runs at our refineries while also improving our clean product yield. Many of our refineries have the complexity to run advantaged Canadian crudes and we have access to multiple transportation systems to reliably deliver these crudes to our U.S. refineries resulting in an overall competitive advantage. U.S. advantaged curdes increased from 52% last year to 61% year-to-date in 2012. This was primarily driven on increasing Canadian heavy crudes as well as domestic WTI price linked streams including an increase in the amount of shale crudes that we processed. Please note that the bar graph on the left has been updated from what we shared with you last quarter as we are now providing additional detail on different types if U.S. crude slates that we run.

Now moving on to slide 12, Marketing, Specialties and Other generated earnings of $95 million, that’s $154 million lower than the same quarter last year. As shown on the slide, lower margins were the main driver for the decrease accounting for approximately $130 million of the variance. We saw large swings quarter versus quarter as we had gains last year related to inventory management compared with losses this year. Also impacting margins were product prices rising more sharply this year compared to last year tied mainly to the impact or the impacts from Hurricane Isaac and lower gasoline exports. Volumes decreased over $30 million quarter-over-quarter primarily due to reduced volumes resulting from a weaker power market, planned maintenance internationally and from Hurricane Isaac domestically. Other includes favorable foreign exchange impacts. Year-to-date MSO has generated earnings of over $500 million, which is in line with year-to-date earnings that we showed for 2011.

Slide 13 shows our per barrel metrics. Refining and Marketing’s income per barrel improved this quarter to $6.37 per barrel with cash contributions of $7.21 per barrel. This now completes our review of the Refining and Marketing business segment.

Next, we’ll move to the Midstream segment beginning on slide 14. Our Midstream segment was impacted this quarter by reduced equity earnings from DCP Midstream largely driven by depressed NGL prices as quarter-over-quarter prices were down 42%. Year-to-date, our annualized return on capital employed was 28%, down slightly from the high of 30% in 2011. We ended the quarter with $800 million in capital employed in our Midstream segment. As mentioned earlier, during the quarter, reported earnings were negatively impacted by approximately $133 million associated with the after-tax non-cash impairment of our equity investment in the Rockies Express Pipeline.

As we move to slide 15, Midstream's adjusted earnings of $56 million were comprised of $39 million in earnings associated with our interest in DCP Midstream, and $17 million from our other midstream businesses.

The next slide provides additional variance explanations for both DCP Midstream and other midstream earnings. As shown on the top portion of this slide, earnings associated with our interest in DCP Midstream decreased by $48 million this quarter, mainly due to DCP's exposure to NGL prices. This was partially offset by a reduction in depreciation expense that is attributable to an overall increase in the remaining useful lives of DCP's assets that was implemented last quarter. Our other midstream businesses were down $14 million driven in part due to inventory impacts.

Shifting now to discussion of our Chemicals segment, please turn to slide 17. Our Chemicals segment consists of our 50% equity interest in Chevron Phillips Chemical Company or CPChem. CPChem had another great quarter providing equity earnings of $275 million. CPChem achieved a 97% capacity utilization rate in its olefins and polyolefins segment allowing it to capture the cost advantages in the North American and Middle Eastern ethylene and derivatives markets. Year-to-date annualized after-tax return on capital employed for our Chemicals segment increased from 31%, and this is up from 28% last year and we ended the quarter with $3.6 billion in capital employed.

Special items for the quarter included a $122 million for losses associated with CPChem's early debt retirement and impairment of fixed assets, along with an increase in deferred tax liabilities related to the Phillips 66 spin from ConocoPhillips.

The next couple of slides provide more detail on the Chemicals segment earnings. Turning to slide 18, this quarter adjusted earnings increased by $82 million compared to the same period last year. The increase in earnings was primarily in olefins and polyolefins due to stronger chain margins. This was primarily attributed to reduce feedstock cost due to higher industry ethane inventories as well as continued strong demand for derivatives. Additionally, CPChem's operations continued to benefit from lower utility costs stemming from low natural gas prices.

Slide 19 provides additional details on CPChem's operating segments. In the top part of the chart, olefins and polyolefins generated equity earnings of $225 million in the third quarter. As previously mentioned, the $63 million was due primarily from higher olefins, polyolefins chain margins and lower utility costs as a result of reduced natural gas prices. Equity earnings from Specialties, Aromatics and Styrenics increased by $4 million compared to the same period last year. This was mainly due to higher equity earnings from Saudi Chevron Phillips driven primarily by higher sales volumes and margins. This concludes our discussion of the financial and operating results for the quarter.

Next, I will provide you with some outlook items for the fourth quarter. As shown on slide 20, I want to start by providing an update on our Northeast operations, where we have the Bayway refinery located in Linden, New Jersey and three storage terminals in the New York, New Jersey area. As you know, Hurricane Sandy made landfall in the Northeast on Monday evening. Prior to the storm, we safely idled the refinery and shutdown the terminals as a precautionary measure. There was some flooding in low-lying areas of the refinery, but floodwaters have since receded, and as of this morning, power has been restored at Bayway. We are currently assessing the condition of the assets and a decision on resuming the operations will be made once this assessment is complete.

So, from an outlook perspective, for the fourth quarter, in Refining and Marketing, assuming Bayway is running, we expect our global utilization rate to be in the low 90s and our pre-tax turnaround expenses to be approximately $100 million. Scheduled maintenance, the scheduled maintenance turnarounds at the Wood River, Borger, and LA refineries are currently underway and are proceeding as planned with return to normal operations expected in November.

In Midstream, as we noted in our earnings release, we expect to acquire an interest in two NGL pipelines currently being constructed by DCP Midstream. And Tim will talk about this more later in his remarks. This investment will increase our total capital investments by an estimated $700 million to $800 million over the 2012 and 2013 time periods. Excluding the pipeline expenditures, total capital expense for the year is estimated at $1.2 billion to $1.4 billion.

In Chemicals distributions resumed in the fourth quarter after the completion of CPChem's debt repayment program. Corporate and other is expected to be a cost of about $40 million per month or approximately $120 million for the quarter and this includes after-tax net interest expense of about $50 million. In October, our Board of Directors declared a $0.25 per share dividend payable in the fourth quarter. This 25% dividend increase along with our $1 billion share repurchase plan is part of our strategy to return capital to our shareholders. We expect to complete the share repurchase program by the end of 2013.

We can now turn to slide 21, and I'll hand the call over to Tim Taylor to take you through an update on how we are advancing our strategic initiatives. Tim?

Tim Taylor - Executive Vice President, Commercial, Transportation, Business Development

Thanks, Greg. We continued to execute our strategy of enhancing returns, delivering growth, and increasing shareholder distributions. In Refining and Marketing, we are improving margins, enhancing returns by increasing runs, advantaged feedstocks and increasing refined product export capability. In order to supply higher quality, lower cost crude to our refineries, we are improving our logistics infrastructure and developing new sources of crude supply. For example, we are delivering 30,000 to 40,000 barrels per day of advantaged crude to our Bayway refinery by rail. We are also ramping up deliveries of locally produced Mississippian line crude into our Ponca City refinery via pipeline and truck.

We expect to receive up to an additional 50,000 barrels per day of this high-quality crude in the Ponca City by the end of 2013. We have also reached agreement with Kinder Morgan to deliver up to 30,000 barrels per day of Eagle Ford crude via a new pipeline connection to our Sweeny refinery in early 2014. All-in-all, by mid 2014, these actions along with others that we are taking are expected to increase our access to advantaged crudes by about 165,000 barrels per day across our domestic refining system. This represents about 9% of our U.S. refining capacity.

We also continued to increase clean product export capability through low-cost capital investments in order to meet growing international demand. As part of our ongoing portfolio optimization efforts, we have been evaluating the potential disposition of the 1.2-gigawatt Immingham Combined Heat and Power Plant in North Lincolnshire, England which is adjacent to our Humber refinery. The marketing period could last several months and we'll continue to operate the asset as usual during this period.

We remain committed to expanding the Midstream business as part of our strategy to deliver long-term profitable and valuable growth. We have reached agreement in principle to acquire a one-third ownership interest in DCP's Sand Hills and Southern Hills NGL pipelines representing a total estimated investment of approximately $700 million to $800 million. This investment will enable DCP to maintain its growth plan throughout the or through the 2015 time period and these pipelines strategically complement our Midstream and Chemicals businesses. The Sand Hills Pipeline is expected to commence deliveries of NGL from the Eagle Ford shale into Mont Belvieu by year end. DCP recently started the South Texas segment of its Sand Hills NGL pipeline, initially delivering 10,000 barrels per day of liquids from the Eagle Ford to the DCP Partners' Wilbreeze pipeline. The second phase was service from the Permian basin is targeted to be in operation by the second quarter of 2013. The Southern Hills Pipeline project which will extend from the mid-continent region to Mont Belvieu, Texas remains on schedule for completion in mid 2013.

In Chemicals, CPChem announced in October that the Saudi Polymers Company world-scale petrochemicals facility in Saudi Arabia began commercial production. CPChem's projects in the U.S. Gulf Coast are progressing as planned, including the proposed ethane cracker and related polyethylene facilities as well as their 1-hexene plant.

Finally, we'd like to remind you that we will be hosting our first Philips 66 Analyst Meeting in New York on December 13. We look forward to seeing you there or having you listen to our webcast. This completes our prepared remarks. We'll now open the line for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) At this time, we have a question from Edward Westlake from Credit Suisse. Please go ahead.

Edward Westlake – Credit Suisse

Good morning everyone. And congratulations on the earnings, and I obviously hope everyone at Bayway is safe. I guess a quick question. Firstly, you have got very strong free cash generation, so I guess our thoughts are going to turn to additional opportunities as well as distributions, and I am sure you are going to get lots of these questions at the Analyst Day, but can I ask you a question about returns? What sort of hurdle rates do you think are appropriate for say, volatile chemical cracking or NGL fractionation versus sort of longer term more stable logistics contracts?

Tim Taylor

I think when you – this is Tim Taylor, Ed. I think when you look at the Midstream and the fee-based kinds of projects we see returns in the low-double digits to mid-teens. As you think about the Chemicals space, we would plan in the 15 or higher kinds of returns for that and similar kinds of thoughts around the NGL expansions.

Edward Westlake – Credit Suisse

Great. And then when I am talking about the – obviously we can see a lot of logistics great potential in North America, but I guess I’m less familiar with the potential in Chemicals, I mean you’ve talked very clearly about the Gulf Coast ethane cracker. But I’m just wondering could you give us some – any thoughts about other opportunities outside of that big project that you could potentially go for?

Tim Taylor

I think when you look at the chemicals business it’s a global business and the investment thesis really for CPChem has been the focus on advantaged feedstocks. And so it’s gone for Middle East in the early 2000s to really now strong positioning in North America. And so they continued to look at where they can have a competitive advantage in terms of project development on a global basis. So, I think initially still the Middle East, North America arrives to the top, but there is always an interest in Asia as well because of the growth in the market.

Edward Westlake – Credit Suisse

And any opportunities further downstream or just stay pretty much upstream?

Tim Taylor

For downstream from ethylene…

Edward Westlake – Credit Suisse

Yeah you mean…

Tim Taylor

So, I think really the focus has been on the polyolefins and olefins and ethylene derivatives chain. And there are other options as you began look at other kinds of materials, we have strong presence in the aromatics businesses as well. But right now the biggest opportunities had been really in the olefins part of the chain.

Edward Westlake – Credit Suisse

Alright. Thanks very much.

Operator

Thank you. Our next question comes from Doug Terreson from ISI. Please go ahead.

Doug Terreson – ISI

Congratulations on your result everybody.

Tim Taylor

Thanks, Doug.

Greg Maxwell

Thanks, Doug.

Doug Terreson – ISI

So, you guys have been very optimistic on use of advantaged feedstock especially on the West Coast, mid-continent and the Gulf Coast too. And on this point I want to see whether or not you consider there to be significant opportunities on the West Coast as well and how you may be thinking about some of those options. And also on the West Coast some of your competitors appear to be reconsidering their desire is out participate in the California market, because of some of the costs maybe associated with the new regulatory plan. So, my question regards your strategic view of the West Coast market and whether you feel that the positions out there are sufficiently advantaged that they weren’t continued participation and so just kind of a strategic update on that the position of West Coast as a whole as well?

Tim Taylor

Okay. Let me take those a little bit in terms of the market opportunity in the West Coast. They clearly – when we look at the West Coast it’s been one of the more challenged markets from a recovery standpoint post recession. In California, specifically it’s a tough regulatory environment as well, so costs are higher and there is a lot of potential additional cost as new regulations come into effect. That said it’s still a very significant market and we think it’s really important to look at how can we get some of these crudes out of the middle part of the country into the West Coast, particularly California. So, we’re working hard on that to try and change that Doug.

Doug Terreson – ISI

Okay.

Tim Taylor

The comment I’d make on Washington is that that’s got a natural access to the Bakken and North Dakota and Canadian crudes.

Doug Terreson – ISI

Okay.

Tim Taylor

And so I – we kind of separate I think the Washington piece from the California piece that way. But I think everyone is working hard to look at some crude solutions for the West Coast to improve its competitive position.

Doug Terreson – ISI

Great. Thanks a lot.

Operator

Thank you. Our next question comes from Jeff Dietert from Simmons. Please go ahead.

Jeff Dietert – Simmons

Good morning.

Greg Maxwell

Hi, Jeff.

Tim Taylor

Good morning, Jeff.

Jeff Dietert – Simmons

You mentioned the $250 million of feedstock advantages in the press release and I appreciate the comments also in your lead in on 30,000 to 40,000 barrels a day of Bayway rail. But I was hoping you could put that $250 million in perspective perhaps discuss which regions it’s most impactful and what arbitrages you are capturing?

Tim Taylor

So, when we look at that it’s a significant advantage this quarter. So, we kind of touched on the East Coast which is the Bayway with the ability to bring shale crude into Bayway it’s got a great appetite for it. And the other plays that we are really seeing the change is in the Gulf Coast, where we are seeing the HLS, LLS, and the Brent relationships change and bringing in more domestic light-sweet crudes into that region as well. So, access and supply of domestic light into that region has improved its competitive position.

Jeff Dietert – Simmons

And is that primarily Eagle Ford crude going in to replace LLS, HLS?

Tim Taylor

So, that’s Eagle Ford crude moving in from Texas is doing that as well. There is also going to be increasing amounts of WTI moving into that area as well.

Jeff Dietert – Simmons

Via rail?

Tim Taylor

Via rail today. And then obviously the pipeline logistics infrastructure is changing now with the Cushing to seaway reversal and Cushing connection.

Jeff Dietert – Simmons

Very well. Thanks for you comments.

Tim Taylor

You bet.

Operator

Thank you. Our next question comes from Blake Fernandez from Howard Weil. Please go ahead.

Blake Fernandez – Howard Weil

First, good morning. I had a number of questions on the Sand Hills and Southern Hills, I guess I’ll just rattle them off here altogether and maybe you could respond. For one, I am trying to understand the nature of the contract, can you remind me are they fee-based or POP? I am trying to understand or just confirm that it is indeed a one-third outright ownership of PSX outside of DCP, and if that is indeed the case, ultimately where do you see that ownership landing? Could it ultimately be moved to DCP? I know you are considering a new MLP potentially could it be moved there or do you see it just remaining in the PSX umbrella?

And then finally, on CapEx, I think I heard a $1.2 billion to $1.4 billion, I am trying to understand, I thought that was roughly in the range of where we had previous guidance, obviously, this is an incremental investment. So, I am trying to make sure I understand the moving pieces of how CapEx is going to change as a result of this? Thanks.

Greg Maxwell

Yeah, Blake, good morning. This is Greg Maxwell. With regard to the nature of the contracts, still in process, but they are pushing more DCP Midstream pushing more towards fee-based contracts. The intent for DCP, their stated intent is to drop their one-third interest into a DPM and having fee-based contracts obviously is a very positive thing for an MLP. With regard to your, I may have spoken too fast with regard to the guidance, the guidance for capital expenditures for the year is in the $1.2 billion to $1.4 billion range, excluding the investment that we would make in Sand Hills and Southern Hills are one-third share. And we estimate that to be in the $700 million to $800 million range. With regard to the structure, we are still working on the structure. We currently anticipate that, that would – we would be acquiring a one-third interest in which it would be a JV-related structure, and so us, Spectra as well as DCP, at this time, would own a one-third interest in the JV structure.

Blake Fernandez – Howard Weil

Okay. And then just one more detailed follow-up if I could, just on the share count, I noticed it actually increased almost about 2.7 million shares or so quarter-to-quarter despite the buybacks. I am just trying to make sure I understand if there was anything we should be aware of going on there?

Greg Maxwell

It's two – sort of twofold really Blake. We purchased what turns out to be a little bit more ratably over the third quarter. So, from a weighted average perspective, you won't see the full impact of those purchased shares until we get into really the fourth quarter. On the flip side, the share issuance side, you saw that we lost little ground on a weighted average basis, but a lot of that was tied to the exercise of options from non – primarily from non-PSX or Phillips 66 employees as well as some additional issuances on our long-term stock savings plan. So, that should be more of a one-time event with regard to that. So, a very astute question, we think from an actual end of the quarter perspective, we basically on a basic share perspective stayed roughly even.

Blake Fernandez – Howard Weil

Okay, fair enough. Thanks a lot.

Operator

Thank you. Our next question comes from Kate Minyard from JPMorgan. Please go ahead.

Kate Minyard – JPMorgan

Hi, good morning gentlemen. Thanks for taking my questions.

Tim Taylor

Hi, Kate.

Kate Minyard – JPMorgan

Hi. I just wanted to ask a few questions on some of the comments that you have around the export capability and increasing that over time. You talked in the press release about increasing export capability through some low cost capital investments, and I guess my questions are first of all where do you see the opportunity as being the greatest whether geographically or product wise? And then what’s the time horizon of this opportunity? So, in other words, how soon does Phillips 66 want to recover its capital and generate a return in order to justify these investments? And then finally how much more flexible is your current refining configuration, so what could you do without additional CapEx in the interim?

Tim Taylor

Yeah. So, we are actually doing a number of projects at our refineries that are located with access to water. And it makes particularly focused in Gulf Coast and West Coast and so these are typically kinds of pipeline connections, tankage those kind of things that can increase the rates for the availability to load export cargos. From an opportunity standpoint when we look at that it’s really when you look at the Atlantic Basin specifically Latin America and West Africa that today have been the primary opportunities that have developed from standpoint and based on supply-demand balances going forward, we would expect that to continue.

Kate Minyard – JPMorgan

Okay.

Clayton Reasor

Did we answer all your questions? Okay, there was something else I think you would.

Kate Minyard – JPMorgan

Yeah. Well, is there a particular time horizon I mean you indicated that you think opportunity would continue, but is there sort of a time horizon, just kind of three year opportunity or do you see it as more extensive or would you like to recover your capital and return a little bit sooner than that?

Tim Taylor

Our target would be to go up to 220,000-230,000 barrels a day of export capability and we’re looking to get that done by the end of next year. So, that’s when we talk about low-cost short-term those are – these are relatively minor projects that we can execute quickly.

Kate Minyard – JPMorgan

Alright, great. Thanks very much.

Operator

Thank you. Our next question comes from Faisel Khan from Citigroup. Please go ahead.

Faisel Khan – Citigroup

Thanks. Good morning. I am wondering if you could elaborate a little bit more on some of your – some of the remarks you made in your strategic initiatives section of your press release. You guys talked about how the PSX has recently entered into several transportation agreements and plans to improve targeted logistics infrastructure. Could you elaborate a little bit more what these several transportation agreements are and the duration of these agreements? And I have a follow-up after that. Thanks.

Tim Taylor

Faisel, we did talk about the connection to the Kinder Morgan crude condensate line that runs close to the Sweeny refinery. So, that’s actually a project or a connector of pipeline that’s relatively short that will be built by Kinder Morgan and so that’s a throughput pipeline connection agreement we have specifically for that. Beyond that, we have talked in the last couple of months about our purchase of railcars to have a very flexible method of delivering these crudes in the developing plays into our refining system. So, there it’s not only the investment in railcars, but it’s also an investment in – around the infrastructure to unload railcars and to load those. And really when we look at our system it’s the ability to unload the railcars when we think about infrastructure logistics that we’re looking at, for instance at Bayway and other refineries as a way to increase the amount of rail that we can take into those various refineries. And so that’s the capital side. And then you we’ve got the commitments in terms from time to time with other third party kinds of logistics providers to make that happen as well.

Faisel Khan – Citigroup

Okay.

Greg Maxwell

Faisel, there are probably some other things that we are working on right now that we just – it will be premature for us to disclose because those contracts haven’t been finalized or the agreements with our counterparties haven’t been flanged up, so there is a lot of work that’s going on in this area. You should expect hearing more as time goes forward. And Tim I don’t know if you want to…

Tim Taylor

No. Yeah, there is a lot of pipeline expansion and opportunities there and we’re just making sure that we’re looking at all those opportunities.

Faisel Khan – Citigroup

Okay, understood. And can you talk a little bit more about – I believe you said there is a major maintenance going on or a turnaround is going on at Wood River, I think you said Ponca and Borger but I was wondering if you could elaborate a little bit more on that in terms of what those turnarounds are and what you guys are doing at the – in your mid-continent portfolio?

Tim Taylor

So, Wood River and Borger are both in turnarounds today. We expect those back in operation here in November. And those are major turnarounds. Borger is a very significant one. We do have some operations continuing at Wood River today. So, those are plant turnarounds that we've had and we got smaller turnarounds going on at LA that have some minor impacts in terms of its throughput.

Greg Maxwell

I think we talked about what $100 million in turnaround expenses.

Tim Taylor

Right.

Faisel Khan – Citigroup

Okay, great. And last question from me, the 30,000 to 40,000 barrels a day of advantaged crude that you guys consumed at Bayway, is there anyway give us idea of what the cost of getting that crude into the refinery was, what was the advantage of bringing in that crude versus taking a West African barrel, was it a $3 advantage, $5 advantage what was the real crude advantage you guys realized into Bayway from that strategy?

Tim Taylor

I think you’re going to appreciate that prices move around, but on average we would use $2 to $3 a barrel.

Faisel Khan – Citigroup

Great, thank you very much. I appreciate your time.

Operator

Thank you. Our next question comes from Doug Leggate from Bank of America. Please go ahead.

Doug Leggate – Bank of America

Thanks. Good morning guys. Thanks for taking my questions.

Tim Taylor

Good morning, Doug.

Doug Leggate – Bank of America

Hi, I have got one strategic I guess and one maybe couple of housekeeping ones. As you look at the Gulf Coast you talked in your remarks about how you started to see Louisiana light I guess see some benefit relative to imported light sweet crude like Brent for example. We’ve obviously been noticing that as well as and curious as to whether you can us your prognosis as to how this is likely to play our how you’ll react to it in terms of your ability to ramp up you light sweet crude barrels and maybe substitute your light-sweet crude barrels. I’ll stop with that one and of course a couple of housekeeping ones please.

Tim Taylor

Yeah, Doug, this is a continuing story and we’ve seen the imports of offshore light sweet diminished particularly in the Gulf Coast. And so I think all of us in that area are looking at that, we’ve very active in this area. So, the increasing supply of these light crudes out of the U.S. ultimately we believe that will displace that waterborne barrel into particularly the Gulf Coast. So, I think our view is that when that happens, that puts additional pressure on the LLS price to be competitive. So, I think that we would continue to expect that there could perhaps be some additional widening on the Brent LLS spread.

Doug Leggate – Bank of America

Do, you think what we’re seeing right now is indicative this has already started to happen?

Tim Taylor

I believe it has started to happen, yes.

Doug Leggate – Bank of America

Okay, have you guys taken any sort of base line shipping commitments on the seaway expansion?

Tim Taylor

I don’t, I’m not sure, we have if and we did we probably wouldn’t…

Doug Leggate – Bank of America

Right, okay, fair enough. The housekeeping one, just real quick the inventory gain Clayton I think that’s included in the gross margins. Can you break it up by region as to where that gain was realized?

Clayton Reasor

So, you’re talking about $100 million difference?

Doug Leggate – Bank of America

Right, year-over-year.

Clayton Reasor

Do we have that Greg or…

Greg Maxwell

As far as the split, most of that was in the Gulf region and into the East Atlantic basin area as I recall.

Doug Leggate – Bank of America

Got it…

Clayton Reasor

Doug, the single largest variance was in the Atlantic Basin are of the $100 million.

Doug Leggate – Bank of America

Got it. That’s kind of what I was expecting. And I guess the final one I don’t know if you can give us this or not, but it looks to us following the (indiscernible) results yesterday and yours today, it looks like the European side of the Atlantic Basin was very strong. Is there anyway you could give us some kind of indicative split as to how the earnings split between the U.S. and the international piece of that and I’ll leave with that.

Clayton Reasor

Let’s see we may have something, can you take that Greg?

Greg Maxwell

I think we’ll have to get that for you.

Clayton Reasor

We’ll have – we can, I would just say the European refineries when you look at the third quarter that was their best quarter of the year. I think Whitegate, Miro and Humber all had good quarters but Bayway did as well. I’ll say most of change probably comes from an improvement in earnings out of Europe rather than improvement in Bayway.

Doug Leggate – Bank of America

It’s really helpful. Alright guys. Thanks your time.

Clayton Reasor

Thank you.

Operator

Thank you. Our next question comes from Paul Cheng from Barclays. Please go ahead.

Paul Cheng – Barclays

Hey guys.

Clayton Reasor

Good morning.

Paul Cheng – Barclays

Hopefully, I just have a number of quick questions. Greg, can you share with us that in general what is your insurance policy in terms of BI and property damage?

Greg Maxwell

Yeah, you’re probably talking with – specifically with the Bayway incident and the terminal I guess Paul…

Paul Cheng – Barclays

That’s correct.

Greg Maxwell

From a perspective of that, that falls under name windstorm coverage. And as a result, other than a smaller piece in our participation in (Ohio), we do not have any commercial insurance associated with named windstorm coverage. So, as a result, we are basically self-funded.

Paul Cheng – Barclays

Okay. So – and do you have any BI, business interruption insurance or not really?

Greg Maxwell

Yes. We do carry BI insurance, but as you are probably aware, you have to actually take out named windstorm coverage in order to get that associated with any hurricane activity. So, as a result, given the pricing as well as our view of the overall total impact that a hurricane or a named windstorm could have on our operations, we elected not to take out that coverage.

Paul Cheng – Barclays

Okay. So, your second question, Greg, if we assume that the Saudi Arabia chemical plant, the Polymer plant actually was on stream before the third quarter, based on the market condition there, what would the earnings contribution to you guys would be?

Greg Maxwell

You're talking about SPCo startup?

Paul Cheng – Barclays

That's correct.

Greg Maxwell

I think it actually started up in October.

Paul Cheng – Barclays

Right. I was saying that if we assume that it is actually a pro forma there, it actually run in the third quarter, what type of earning contribution you may have, I mean, do you guys have a number you can share?

Tim Taylor

Sure. I think it's clearly in the ramp-up phase of their operations today, but I think in longer term, I might say steady state basis. We'd kind of look at that to be 10% or so of the CPChem contribution.

Paul Cheng – Barclays

Okay. And Greg, can I have some quick balance sheet data, what is your working capital market value of inventory in excess of the bulk and of the total debt, how much is of them that you see in the long-term debt?

Greg Maxwell

With regard to the replacement cost in (Technical Difficulty)

Paul Cheng – Barclays

In the third quarter, probably second to third quarter, do we have that increase or that they have already been running at that rate?

Tim Taylor

They have increased, Paul, I can't remember the exact increase, but we are increasing that. And as you can guess, we are continuing to so to speak test the limits and we can go substantially higher. So, I think the challenge for us is to continue to work logistics and get more and more of that into the Bayway refinery.

Paul Cheng – Barclays

Do you have a number that how much is the increase on the WTI link including the Eagle Ford crude runs sequentially from second to third quarter in the Gulf Coast?

Greg Maxwell

Gulf Coast crude run changes. I had to see if I can get back, it did increase, Alliance was down, so the percentages as a percent of total it impacted that somewhat so…

Clayton Reasor

Probably, it did not go up because Alliance was down for two or three weeks.

Greg Maxwell

Right.

Paul Cheng – Barclays

I see. And then in earlier comment, are you saying for Bayway, the up that you realize is about say in the $2 range, do you have a similar number for the Gulf Coast?

Clayton Reasor

Uplift relative to West Africa and North Sea crudes.

Greg Maxwell

I think it really, it's still driven off the LLS, the HLS, (Alliance) and so it's probably in the same order of magnitude right now in that area as well.

Paul Cheng – Barclays

I see. A two final one, one of your competitor is voicing concern about the California market also our long-term future given the regulatory environment, I want to see that what is the view of PSX in terms of California is that still considered as a core market for you guys or that you guys also have your own doubt. Second one, I think maybe is for Greg on dividend you guys have a nice increase 25%, but your payout is still extremely low and that your yield is about 2.1% certainly lower than some of your peers and just want to understand in terms of the criteria and also the timeline on how the board will determine in terms of when or by how much that – what kind of criteria they need to see in order for them to raising a more significant way on the regular dividend given that I think a lot of your long-only account investor may probably quite appreciate a higher dividend yield.

Greg Maxwell

Paul I’ll address the market question on California. As I said a little bit earlier I think we look at the market and say demand continues to struggle out there as well post-recession and then I think you look more fundamentally at the operating environment and the costs associated with the particularly the environmental regulations and we think that’s going to continue to keep pressure on operations in operating costs out there. So, yeah I’d say that from a California perspective that it is one of the more challenged parts of our portfolio in terms of the basic value equation. So, that’s why we’re still looking at the crude side of it and continuing to stay abreast and then top of what’s going to take to comply the things like AB32 to really maintain your operations out there.

Paul Cheng – Barclays

But Tim, you still view it as a part of your core portfolio or that you may have doubts?

Tim Taylor

In the past California has been a really good in the marketed times, but right now it is our lower performing. So, I think that if our assessment would become that it’s going to be challenged for some period of time, we’d either go to find the way to improve that operation or function of the way to deal with that.

Paul Cheng – Barclays

Okay

Tim Taylor

Greg, do you want to?

Greg Maxwell

Sure, on the dividend question Paul it’s something that we always look at. And I think that’s evidenced by our 25% increase. Our objective is to go to have a dividend that is competitive. We wanted to be also affordable and we also wanted to grow over time I thank Greg Garland our Chairman his view is he wants to look 10 years down the road in the rearview mirror and say every single year he has a history of 66 increasing our dividend. Having said that we also recognized that we’re in a highly cyclical business and as such one of the one of the ways we’d try complementing returning value back to the shareholders is through our share repurchase program. That gives us some opportunity to basically create a swing – a variable swing in the event that we hit the low point of cycle then we’re able to maybe pull back a bit on that if our cash requirements required it. So, I think from a guidance perspective the intent is for us to look at and get in a pattern of an annual view of our dividend increases and probably take an assessment and raise the dividends if appropriate on an annual basis.

Paul Cheng – Barclays

Thank you.

Tim Taylor

Thanks Paul.

Operator

Thank you. And at this time, we have a question from Evan Calio from Morgan Stanley. Please go ahead.

Evan Calio – Morgan Stanley

Hey, good morning guys. Great results.

Tim Taylor

Hey, Evan. Thank you.

Evan Calio – Morgan Stanley

Yeah, I have a quick follow-up and then a different question on utilization levels, but how much LLS are you running today and that's not currently considered advantage crude in your 63% calculation?

Greg Maxwell

So, that's primarily….

Tim Taylor

Primarily, Alliance. So, the LLS, HLS, or Alliance it's the predominant part of our crude runs at that facility.

Evan Calio – Morgan Stanley

Okay. Just – and then a different question, on your aggregate, refining utilizations are high 96% with some downtime at Alliance. I mean, I know that various clean fuel regulations have lowered max utilization from historic highs and runs are dependent upon a feed slate. And is that close to your theoretic maximum or could you kind of walk us through your four regions and tell me where you think they could actually run if they had the right incentive to run?

Greg Maxwell

So, I think that we are seeing in the mid-continent, in the Central Corridor. When I look at that, that we have actually seen sustained runs now creeping up a bit, and I think it does speak to consistency to crude slate in some of the mid-continent operations and continuing improvements in our joint venture refinery at Wood River. So, we have seen that there. Bayway has run very well with processed inputs. So, it's not only just crude runs, but additional input as well on in terms of rolling out the units. So, probably I look at the Central Corridor and say we pretty much ran it about as much as we could. We like to get more, because it's got a great margin today. The California refineries, West Coast were again close to their capacity as well. I would say, that's pretty much it for them. And in the Gulf Cost with Alliance is probably our biggest opportunity after the hurricane and the impacts of that to come on back up to full rates. So, we look around our system, the Atlantic Basin and Europe we are right there, the Central Corridor, so that's the only place, where we didn't run pretty close to capacity would be the Gulf Coast. And then I think that's just a matter of getting Alliance line back out.

Evan Calio – Morgan Stanley

And what would full be for the Gulf? Would it be in the high 90s?

Greg Maxwell

Yeah, yeah. I think we look at that 95% and above as pretty high capacity utilization.

Evan Calio – Morgan Stanley

Great. And just maybe one last question if I could, I know it's been – look MLPs have been a real defining element of this cycle, inclusion of more and more cyclical assets have grown in popularity as well as IRS permissibility and valuation in the market. I mean, can you discuss maybe how your consideration has changed or how you think about the suitability of that structure for either refining assets or in ethane cracking assets, where I know you have a partner that would have equal say but how do you think about the suitability of the structure for those assets actually?

Tim Taylor

Well, I think we certainly see the value that can be created from an MLP. As Greg talked about earlier with fee-based kinds of assets or our transportation logistics assets, we look at that and we say okay we see the value creation. It's got some other challenges so to speak when you did the MLP structure in terms of dilutive to ROCE, dilutive to earnings. And so that's kind of the contribution. It can be depending on how you view it relatively expensive from a financial structure. So, that's part of our deliberation and really where we are focused is on that transportation logistics piece with PSX. The variable MLP is pretty early. We'll wait and see. It's great time right now to have those with distributions, but clearly, they are variable. And I think it will be interesting to see how that works out with the test of time, and I can say that in the petrochemicals side, we really don't have any plans to look at that from a cracking standpoint.

Evan Calio – Morgan Stanley

Understood. Thanks guys.

Tim Taylor

Thank you.

Operator

Thank you. At this time, we have a question from Cory Garcia from Raymond James. Please go ahead.

Cory Garcia – Raymond James

Thanks. Good morning fellows. A great quarter. I was just hoping that kind of in the petrochem theme, would you guys be able to provide a bit more color into the demand trends you guys are seeing in terms of your polyolefin business, clearly the U.S. trends seem a lot stronger than what we are seeing in Europe and elsewhere, but anymore color you guys could have in terms of Asia, Latin America? And then also refresh me on the, I guess the amount of exports you guys actually participate in sort of that market?

Tim Taylor

Okay. So, we kind of break that, when we look around the world, I would say a great place to be today is in the United States. The demand has been relatively stable. It’s still not what I would call robust, but clearly with the operating rates you are seeing, a great place to be at. I think it speaks to the advantaged feedstock that we have here as well as probably a decent demand from the industrial and manufacturing sector. Europe is weak when we look across the globe. Asia has backed off substantially from what you would have thought a year ago, and frankly part of that stems from the weakness in Europe, because they are still heavily dependent upon trade for their manufacturing. So, I don’t think there is anything surprising there, except that perhaps we look at the base U.S. and say it’s a pretty good market. Latin America is still relatively small, but does okay as well.

And then when we think about the export piece that does provide some underpinning if you will for the petrochemical business in the U.S. And so I think as an industry, I still think about it in the 20%, 25% range of petrochemicals being able to be exported or you can do that. So, a lot of optionality there that develops when you got that kind of cost position. The other thing I’d say on CPChem is it’s important to realize that, if you think about their production base in Middle East and their production base in the United States positioned well in the lower – two lowest cost areas in the world in petrochemicals and I think that shows up in the strength of their earnings.

Cory Garcia – Raymond James

Absolutely. Yeah I appreciate your time guys.

Tim Taylor

Thank you.

Operator

Thank you. This concludes the time that we have for questions and now I will turn the call back to Clayton Reasor for closing remarks.

Clayton Reasor - Senior Vice President, Investor Relations, Strategy and Corporate Affairs

Well, thank you again for the participation interest in the company. You can find a copy of the transcript from the call on our website and we look forward to talking with you all soon. Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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